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Bond Auction: A government bond auction is the

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Tellin_Fibs   Saturday, 01/13/18 05:54:12 AM
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Bond Auction: A government bond auction is the process of selling short and long-term government bonds to investors in an attempt to minimize the cost of financing national debt.

The process starts with the central bank announcing how much money it intends to borrow. Details like the term length of the bonds and the date of the auction are included in the announcement.

Interested market players like broker-dealers, institutions, and individual investors then submit the amount of bonds that they’re willing to buy and bid at the yield that they want to be paid. Take note that the specific processes of bond auctions are different across countries.

The success of a government bond auction can be measured by the bid-to-cover ratio, a metric that measures how much the total bids exceed the initial amount that the central bank was aiming for.

For example, an auction collects bids worth $100 billion, but the central bank had only aimed for $45 billion. The bid-to-cover ratio is 2.22 ($100/$45). An auction with a bid-to-cover ratio of 2.00 or higher is usually considered as successful.

Traders also look at the change in bond yields after each auction. A higher yield means that investors are demanding a higher price for holding the government bond. Alternatively, a lower bond yield usually signals higher investor confidence and lower borrowing costs for the government (which would make it easier to pay debts).


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